U.S. Stocks Drop as Improving Economy, Earnings Fuel Taper Bets

Nov. 12 (Bloomberg) -- U.S. stocks fell, with the Dow Jones Industrial Average retreating from a record, as corporate earnings and an improving economy fueled speculation the Federal Reserve will reduce stimulus next month.

The Standard & Poor’s 500 Index fell 0.2 percent to 1,767.89 at 3 p.m. in New York after closing within a point of its all-time high. The Dow lost 30.98 points, or 0.2 percent, to 15,752.12. Trading volume was 6.6 percent below the 30-day average at this time of day.

"The jobs report Friday, that’s really what changed the idea that we could have a December taper, and ever since then you’ve had more and more comments coming out of the Fed that perhaps it is on the table," James Paulsen, the Minneapolis- based chief investment strategist at Wells Capital Management, which oversees about $340 billion, said in a phone interview. "Last night it was Fisher and now Lockhart. What he came out and said today isn’t earth-shattering but it does add to the momentum to the idea."

The S&P 500 and the Dow Jones Industrial Average have touched records this quarter as the Fed refrained from curbing its $85 billion in monthly asset purchases, while better-than- forecast data and corporate earnings indicate the economy may be strong enough to withstand less stimulus.

Taper Debate

"Some discussion of tapering could well take place" next month, Fed Bank of Atlanta President Dennis Lockhart said today in a Bloomberg Radio interview with Kathleen Hays. Dallas Fed President Richard Fisher said in a speech in Melbourne today that monetary accommodation "becomes riskier by the day."

Economists forecast the Fed will delay tapering asset purchases until the March 18-19 meeting. Policy makers will probably pare the monthly pace of bond buying to $70 billion at that time, according to the median of 32 estimates in a Bloomberg survey Nov. 8. The group next meets Dec. 17-18.

Investors will scrutinize economic reports this week on jobless-benefit claims and manufacturing in the New York area. Data last week showed the U.S. economy grew faster than forecast in the third quarter and hiring rose more than estimated in October. There was no data yesterday and the U.S. Treasury markets were closed for the Veterans Day holiday.

Yellen Hearing

The market may get some insight into Fed thinking when Vice Chairman Janet Yellen testifies before the Senate Banking Committee Nov. 14 during her confirmation hearing to succeed Ben S. Bernanke as chairman.

The Fed support has helped propel the S&P 500 higher by more than 160 percent from its March 2009 low. The gauge has rallied 24 percent so far in 2013, poised for its best year in a decade, and is trading at 16 times projected earnings, more than the five-year average of 14 times earnings, according to data compiled by Bloomberg.

"A lot of U.S. financial firms will start to close their books for the year now after this decent performance," said Ioan Smith, a market strategist at KCG Europe Ltd. In London. "If you’ve had good returns and you outperformed, how much more are you going to get this year? There is a big argument to lock in what gains you’ve got given the risk-reward is not conducive of any significant gains from these levels."

Earnings Scorecard

Some 13 members of the S&P 500 report earnings today. Seventy-four percent of the 450 companies that have released results so far have beaten analysts’ estimates, according to data compiled by Bloomberg.

"It was a good earnings season, it definitely helped the market," Richard Sichel, chief investment officer at Philadelphia Trust Co., said by phone. He helps oversee $1.9 billion.

News Corp. slid 1.2 percent to $17.21 as the publisher reported a 2.8 percent decline in first-quarter revenue, hurt by shrinking demand for print advertising. The news division, which owns papers in the U.S., the U.K. and Australia, saw revenue fall 10 percent to $1.5 billion.

Liberty Global Plc, the European cable operator owned by John Malone, fell 1.7 percent to $78.13. The company is in talks to acquire Intel Corp.’s online pay-TV service under development, according to three people with knowledge of the situation. Malone would use Intel’s system outside the U.S., said one of the people, who asked not to be identified because the talks are private.

Dean Foods Co. fell 8 percent to $18.14 after the company lowered its full year earnings forecast. Dallas-based Dean said dairy commodity prices remain high, creating a more challenging environment than previously thought. The milk producer also said it will start paying a dividend of 7 cents in the first quarter.

Medical Stocks

Hologic Inc. sank 14 percent to $19.77, the biggest drop since May 2009. The X-ray company’s 2014 forecasts for sales and adjusted revenues fell short of analysts’ estimates as the company sees "headwinds." At least three research firms cut Hologic’s stock to the equivalent of a hold rating.

Sarepta Therapeutics Inc. plunged 64 percent to $13.13, the lowest since September 2012. U.S. regulators indicated more data may be needed before the company files a new drug application for its experimental treatment for Duchenne muscular dystrophy. Sarepta has no products on the market. The stock had climbed 42 percent this year through yesterday.

Xerox Corp. rose 3.9 percent to $10.68, the biggest gain in the S&P 500. The printer and photocopier pioneer predicted that 2014 earnings may grow more than analysts estimate, as business services account for a bigger chunk of its revenue.

D.R. Horton Inc. gained 3.2 percent to $18.63. The largest U.S. homebuilder by revenue reported a higher quarterly profit as it increased prices amid a nationwide housing recovery.

The Bloomberg U.S. Airlines Index added 2.2 percent, headed for the highest close since April 2007. Delta Air Lines Inc. rose 2.4 percent to $28.14. Carriers are benefiting as jet fuel prices retreat from an eight-month high against diesel amid rising output and the lowest seasonal demand in more than two decades.

US Airways Group Inc. fell 0.3 percent to $23.19. The carrier and American Airlines reached an agreement with the U.S. Justice Department over the government’s bid to block their merger, clearing the way to a tie-up that would create the world’s biggest carrier.

The airlines must give up slots at Washington Ronald Reagan National Airport and New York’s LaGuardia Airport under a proposed settlement. AMR Corp., American’s parent company that is in bankruptcy, rose 25 percent to $11.87 in over-the-counter trading.